A firm has determined its cash-to-cash cycle time to be 60 days. The number of days' payables outstanding is 25, and number of days' sales outstanding is 35. If the firm reduces its inventory by 20%, the new cash-to-cash cycle time, in days, will be approximately:
The cash-to-cash cycle time (CCC) can be calculated using the formula: CCC = Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) - Days Payables Outstanding (DPO). Given that the initial CCC is 60 days and DSO is 35 days and DPO is 25 days, we can find the original DIO as follows: 60 = DIO + 35 - 25, so DIO = 50 days. If the firm reduces its inventory by 20%, the new DIO will be 50 - 20% of 50 = 50 - 10 = 40 days. Plugging this into the formula: CCC = 40 + 35 - 25 = 50 days.
Initial Inventory = 60+25-35=50 After reduced 20%, Inventory= 40 New Cash to Cash= 35+40-25= 50
CC = DIO+DSO-DPO 60 = DIO+35-25 DIO = 60-35+25 = 50 Inventory reduced by 20% , new DIO will be 50- 20%of 50 = 40 CC= new DIO+35(DSO)-25(DPO) =40+35-25 =50
Imo, it's C Cash to cash calculation formula doesnt include inventory, so even if inventory level changes the cash to cash time remains 60 days